Raising The Minimum Wage: Whom Does It Help?

For some of America's lowest-paid workers, the new year means a pay raise. Some states set their own minimum wages, above the federal rate of $7.25 an hour, and that rekindles an old debate over whether minimum wages make sense — especially at a time of high unemployment.

Like several other states, Washington state's minimum wage is indexed to the cost of living. This year, the formula has raised the statewide minimum from $8.67 to $9.04 an hour, making it the nation's highest statewide rate.

Zack Colon is just out of college, and while he prepares for grad school, he works as a chef. He says that extra 37 cents an hour will make an appreciable difference to his weekly income.

But for Colon's boss, the raise is an unwelcome financial burden. Skyler Riley is a young entrepreneur, and two years ago this 20-something opened his restaurant — Rainin' Ribs — just outside Seattle. Even though he owns the place, Riley also works the till.

"With your payroll, you know you can operate a lot yourself, you can certainly cut hours in a way that you physically use your own two hands," Riley says. "But when you're raising the payroll costs of an hourly minimum wage, it's definitely not helping."

Pro-business groups in Washington state say the $9-an-hour wage may prove to be a "tipping point," a kind of sticker shock that could discourage employers from hiring more people. There's even a theory that the state minimum wage — which is counted separately from tips — might explain the understaffing and lousy service at some Seattle restaurants. It's Economy 101: The more you raise the price of something — employment, in this case — the less of it there'll be.

"I don't think there's any sensible economist who thinks you could double the minimum wage and not throw a lot of people out of work," says David Neumark, director of the Center for Economics and Public Policy at University of California, Irvine. There is a debate, he says, over the effect of incremental raises for the small group of largely unskilled workers who earn the minimum wage.

"The consensus from a lot of studies I've surveyed — including my own — says that a 10 percent increase in the minimum reduces employment of those very low-skilled groups by about 1 to 2 percent," he says.

Keep in mind, that's 1 to 2 percent of the people earning minimum wage, and they make up only about 5 percent of the workforce nationally. So the job losses are pretty tiny.

Defenders of the minimum wage say it's even less than that, pointing to a couple of recent studies that show zero net job loss. David Cooper, an analyst with the pro-labor Economic Policy Institute, says the minimum wage is especially necessary now.

"When you have lines of the unemployed around the corner looking for jobs, there's no real pressure for employers to raise wages," Cooper says.

And in this age of Occupy Wall Street, Cooper says, pushing up that wage floor is one way to address growing income inequality.

"Increases in the minimum wage are essentially a shift from corporate profits to low-wage employees," he says. "And we know that low-wage employees spend more of their money. They're going to spend essentially every penny they get, so that increased demand is going to result in more economic activity and potentially more jobs."

Still, economists on both sides tend to agree that the minimum wage itself isn't that big of a factor for America's working poor. For one thing, many of the people earning the minimum aren't poor at all; they're teenagers or middle-class part-timers looking for extra income.

The working poor tend to earn more — because they have to if they're supporting a family. For them, the benefit of recent minimum-wage hikes has been relatively small, especially when compared with other anti-poverty programs such as the federal Earned Income Tax Credit.